Practical FAQ

Guide to the Value-added tax (“VAT”) system in Korea

1. What is the standard VAT rate in Korea, and who is subject to it?

The standard VAT rate in Korea is 10%. Anyone who engages in the supply of goods or services independently in the course of business, including individuals, corporations, and government bodies, is subject to this tax. Additionally, non-residents providing electronic services (such as software, games, cloud computing, or advertising) to non-VAT registered individuals or companies in Korea are also subject to the VAT

2. What are the VAT taxable periods, and when are the tax returns due?

The taxable year is divided into two periods: the first period runs from January 1 to June 30, and the second period runs from July 1 to December 31. Taxpayers are required to file preliminary returns (for the Jan-Mar and Jul-Sep periods) and final returns within 25 days after the end of each respective period.

3. Are there any transactions eligible for a zero-rate VAT or VAT exemption?

Yes. A zero-rate VAT is applied to exported goods, services rendered outside of Korea, and international transportation by ships and aircraft, allowing the incurred input VAT to be refundable. On the other hand, certain goods and services like basic life necessities, social welfare services, and cultural items are exempt from VAT, though the input VAT incurred on these exempt items is not refundable.

4. How is the VAT payable calculated, and can all input VAT be deducted?

The VAT payable is computed by deducting the input VAT from the output VAT chargeable on the supplied goods or services. However, not all input VAT is deductible. For instance, input VAT on expenses not directly related to the business, entertainment expenses, and the purchase or maintenance of passenger cars (except for transportation and car sales businesses) cannot be deducted.

5. What are the invoicing and record-keeping requirements for businesses in Korea?

When supplying goods or services, registered taxpayers must issue a VAT invoice to the other party, and corporations are legally obligated to issue electronic VAT statements. Furthermore, all taxpayers must maintain accounting records and keep their books, VAT invoices, or receipts for five years from the date of the final return for the relevant taxable period.